After a rather quiet period in April, during which the industry lamented the partiality of the Financial Conduct Authority’s (FCA) latest thematic review, assessed its fallout, and, presumably, sat down with the regulator to re-negotiate some of the paper’s more contentious points, the UK retail market is showing signs of picking up again. Already buoyant in March (issuance was up 46% and sales were up 1.5 times on the year), the next couple of months promise to bring growth as the usually busy spring/early summer period gets underway.

In the last month alone, 39 index-linked structured notes matured, returning on average 30.8% growth. Many of these products offered the much coveted autocall option, including the Focus Structured Solutions FTSE/Eurostoxx Defensive Booster Plan April 2014. The medium-term-note (MTN), issued by Credit Suisse and listed on the Luxembourg Stock Exchange, returned 10% plus the initial capital invested after just one year of investment, a yield considerably higher than alternatives like cash or bonds.

“We already had a 10% maturity in February, and we have a large number of other potential early maturities this year, from a multitude of structured product shapes and payoff profiles,” said Robbie Briginshaw, managing director at the London-based distributor, which has been offering structured products in the UK since December 2013. All of Focus’ income plans – linked to underlyings ranging from single indices to baskets of stocks – have also paid all of their periodic coupons, averaging 8-9% pa, according to Briginshaw.

While such returns are by no means unprecedented in structured products, they are worth highlighting given the record-low interest rate environment we are in. According to Briginshaw, double-digit returns can be achieved in a flat or falling market by buying into more than one underlying, such as the FTSE 100 and the Eurostoxx 50 indexes. While it must be highlighted that exposure to more than one market is riskier, the rewards can be much higher, a compromise which investors are increasingly accepting. The Eurostoxx 50 has emerged as the diversifier of choice to the FTSE 100, with the combination seizing 16% of market share year-to-date, up 1% on last year.

“The pairing of these two indices is attractive to investors, especially when using worst-of strategies,” said Sam Eade, structured product development manager at Reyker Securities. “The high correlation between the UK & European markets (over 0.8, according to Bloomberg) suggests the two indices should move in line with each other. The European market also shows real value and investors are positive about the FTSE making new highs.”

However, the choice of underlying is not enough on its own to guarantee a return. “Because the risk increases with the more indices you are exposed to, it is the payoff profile of the product that can make the real difference,” said Briginshaw. “For this April Defensive Booster Plan, to mitigate the risk while maintaining potential upside, we included a stepdown feature for the autocall opportunity, which becomes increasingly defensive as the term of the product increases, allowing the indices to fall to a predetermined level and still provide a positive investment return.”

Like Focus’ Defensive Booster plan, Reyker’s Dual Index Superstart Kick Out Plan March 2014, also created by Credit Suisse, autocalled at the first opportunity for a return of 13%. “The superstart shape is popular among our client base due to the inflated coupon at the first potential autocall,” said Eade. “While we are currently in a bull market, there is an air of uncertainty and gains in the UK market over the past year have been limited. The at-the-money autocall level allows investors to achieve double-digit gains even in a flat market.”

SRP data has recorded some outstanding early maturities over the first quarter of 2015, from Investec’s FTSE 100 Geared Returns Plan 16 - Option 1 (Investec Version) which returned 75% after five years, to Arc Capital’s Bull & Bear Enhanced Investment Plan 6, returning an eye watering 106.35% growth after six years of investment.

While the above products are admittedly at the higher end of the scale, all index-linked products which matured in the first quarter of 2015 outclassed cash and bonds and in many cases beat direct investment in the underlying: Meteor’s FTSE Stoxx Kick-Out March 2013 (22.5% after two years); Meteor Kick Start FTSE Autocall April 2013 and Royal Bank of Scotland UK Higher Growth Kickout Plan (April 2013) (both 20% after two years); Morgan Stanley FTSE Defensive Bonus Plan 9 (Adviser Fee Version) (18% after two years); and Barclays B022 FTSE Autocall (15%, again after two years).

Products maturing after one year were also numerous this quarter, with providers Investec, Meteor, Gilliat and Walker Crips boasting annual returns of between 9% and 13%.

Of the 90 index-linked products that matured since the end of March, 100% have returned the initial capital invested plus returns above 5%. These figures follow and further reinforce research by Lowes Financial Management (LFM) which shows that more than 90% of UK products maturing in 2014 delivered gains, with only 1% delivering a loss.

“These are satisfying results for the industry, and they reflect the hard work and due diligence that goes into designing and launching a product, including the huge amount of back and stress testing that Focus, the counterparty Credit Suisse, and also our plan manager and principal, Meteor undertake,” said Briginshaw.

Through a mixture of self-regulation, greater engagement with the regulator by a more vocal UK Structured Product Association (UKSPA), and improvements at a macroeconomic level, the market appears to be picking up. With uncertainty in Europe over a potential Greek exit from the European Union – dubbed "Grexit" by some – triggering an increase in volatility, and quantitative easing improving rates, requests for bespoke product pricing have reportedly spiked. Whether they are the latest signal of a full-blown recovery or not, these latest maturity figures will be a sweet vindication for the structured product die-hards.

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